Companies Keeping Cash In One Place To Minimize FX Risk

By Chana R. Schoenberger

Companies are increasingly pooling the cash they use to pay bills overseas, balancing a variety of currencies at one bank.

This strategy has taken off in the last year and a half as worries about counterparty risk and economic turmoil have swept from Europe throughout the world. Combining cash allows companies to rescue more of their money from small accounts at local banks and put it to use elsewhere, while also freeing them from converting between currencies, reducing the need for foreign-exchange hedging.

“Corporates are trying to self-fund wherever possible given concerns about market liquidity and expectations around increasing costs of bank borrowing due to regulatory changes,” Schickler said.

Tenneco, an automotive parts manufacturer in Lake Forest, Ill., makes mufflers and shocks around the world, requiring the company to deal in thirteen currencies. The company used to handle its $7 billion in foreign-exchange exposure from Dublin, where a subsidiary also managed intra-company loans between other Tenneco units worldwide.

Six years ago Tenneco started a notional cash pool in Amsterdam with Royal Bank of Scotland, offsetting the company’s currency holdings. That decision cut foreign-exchange risk requiring hedging to less than $1 billion, representing mainly Tenneco’s business in countries that don’t allow pooling, said Assistant Treasurer Gary Silha.

Tenneco maintains accounts in countries where it does business, to pay workers and vendors, and to accept customers’ payments. Each day, balances in the local accounts are set to zero and excess cash is sent to Amsterdam. If the local account has a debit balance, the RBS system tops it up in local currency until the balance is zero.

Once the cash arrives at RBS, it stays in its own currency. The RBS system figures out how much it’s worth in dollars. Then the bank nets each subsidiary’s Amsterdam account against the others based on its dollar value, so Tenneco doesn’t have to pay overdraft fees on each.

Because the bank nets long and short currency positions across the accounts, it’s easier for the Tenneco treasury to see the exposures and manage them. That’s pushed down the currency hedges the company buys to less than $1 billion per year of forward contracts, Silha said.

To make a debt payment in the U.S., the money can be transferred immediately, in dollars, without converting currencies. During the 2008 financial crisis Tenneco avoided liquidity problems because its cash was all in one place and could be moved easily, Silha said.

“We’ve shifted all those exposures to the notional cash pool and RBS is taking that exposure,” he said. “All the cash at all the subsidiary levels is concentrated and we have access to it on a same-day basis.”

Companies set up cash pools in places with friendly laws like London, Amsterdam, Brussels, Hong Kong, Singapore, and Sydney. Because multi-currency pools cut down on hedging, overdrafts, and other fees, clients can save money, said Paul Simpson, Bank of America’s head of global transaction services.

Bank Mendes Gans NV, the Amsterdam cash-pooling division of ING Group, has 250 clients, half in the U.S. Most use the currencies in their pools to construct synthetic foreign-exchange hedges, said Karen Kombrink, an executive vice president.

Because the pool contains many currencies, it’s possible to buy spot-rate currency that the company will need rather than using a forward contract. A spot transaction isn’t a derivative, so the company doesn’t have to prove that the transaction is a hedge offsetting a business purpose according to accounting rules, Kombrink said.

For a currency that’s difficult to trade, like the Korean won, companies still would use traditional currency hedges, she said.

“Corporates, especially after the events of the last three to four years, are looking more at their own cash as a source of funding of day-to-day operations,” said James Campion, the RBS vice president in Chicago who works with Tenneco.

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